Debt Reduction Is Hurting the Economy

For left-leaning writers, at least, it's almost cliché to note the extent to which the press defers to deficit hawks, despite clear evidence that deficits are not a pressing problem for the United States. Even still, it's worth noting when reporters pass along received wisdom, especially when we have fresh data to show the folly of Washington's obsession with deficit reduction. To wit, here's TheWall Street Journal with a piece that just cedes the idea there's a deficit problem and it requires further "belt tightening" from the federal government:

A slowly improving economy and recently enacted tax increases will help bring down the federal deficit for the next few years, the Congressional Budget Office said Tuesday, but it will take another $2 trillion in belt-tightening over the next decade to begin to move the federal debt closer to historic levels. […]

CBO projects that if Congress leaves current laws unchanged, the debt will be 77% by 2023, and it will be higher if across-the-board spending cuts are diluted or various expiring tax breaks extended.

If you ignore the false urgency-there's no need to budget for a decade hence-it's not clear that this is a problem. Remember, debt is only a problem when it begins to outpace overall growth in the economy. But if the economy is growing faster than our growth-and if the overall size of our economy is greater than our debt-then there isn't much of a problem. At that point, reducing the debt is an ideological concern, not an economic one.

Indeed, you could say the same for the current situation. Here is what the CBO projects for the next ten years of deficits:

×

If we continue on our current path, President Obama will finish his second term with the lowest deficits since George W. Bush won reelection. In fact, Obama has already fulfilled his 2009 pledge of halving the deficit by the end of his first term, from $1.8 trillion when he entered office, to a projected $845 billion deficit for the current fiscal year.

It should be said that none of this is good. Buried in the CBO report is a key fact about Washington's zeal for deficit reduction:

"[E]conomic activity will expand slowly this year, with real GDP growing by just 1.4 percent…That slow growth reflects a combination of ongoing improvement in underlying economic factors and fiscal tightening that has already begun or is scheduled to occur-including the expiration of a 2 percentage-point cut in the Social Security payroll tax, an increase in tax rates on income above certain thresholds, and scheduled automatic reductions in federal spending. That subdued economic growth will limit businesses' need to hire additional workers, thereby causing the unemployment rate to stay near 8 percent this year, CBO projects"

Debt reduction has put a real damper on the recovery. We would have higher growth and lower unemployment if Washington would spend more, or at least, avoid spending cuts and tax increases. The economic contraction of last quarter wasn't an accident-austerity reduces economic growth. Far from building "confidence" in the system, debt reduction has made us worse off.

Your donation keeps this site free and open for all to read. Give what you can...

My hope is that we can avoid further damage by postponing the sequester, which is designed to slice $1.2 trillion from the federal budget. A cut of that magnitude will stall the recovery and inflict real damage on the economy. If we want to secure our finances, we need economic growth. And given cheap government debt, the prudent choice is for Congress to ignore the sequester, borrow the money, and protect the recovery.

If you are scraping by right now, please don’t give us anything. But if you have the ability to support independent, non-profit journalism, we are so grateful. Your voluntary contribution helps keep this website paywall-free. You can sign up as a subscriber with a range of benefits, including an opt-in to receive the print magazine by mail.